ABSTRACT
This chapter highlights how developments in political economics contribute to the understanding of macroeconomic policy and, more specifically, of the timing, design, and likelihood of success of stabilizations achieved through monetary and fiscal reforms. It discusses the role of rationality in political-economic models and related methodological issues. The chapter addresses the timing of macroeconomic policy in general, and of fiscal reforms in particular, in relation to the timing of elections. It focuses on how ideological and opportunistic considerations influence the choice of when to implement certain policies. The chapter examines the related issue of why stabilizations are delayed and reviews the theory and empirical evidence of political cycles in economic policymaking. It emphasizes why suboptimal economic outcomes such as hyperinflation and out-of-control budget deficits are not corrected for extended periods of time. The chapter also emphasizes which political-institutional features are most likely to produce the timely adoption of successful stabilization programs.
